Gary A. Wagner

Are state budget stabilization funds only the illusion of savings?: Evidence from stationary panel data

Abstract State governments have dramatically expanded their use of budget stabilization funds (BSFs) in recent decades. While stabilization funds have the potential to assist states in smoothing fluctuations in the budget, the extent to which balances in stabilization funds are substitutable with general fund balances is not yet resolved. Using new panel unit root tests, this paper finds evidence of unit roots in data series used by previous researchers. After accounting for the non-stationarity, I find strong evidence that monies retained in stabilization funds are, to a large degree, substitutable with monies held in the general fund.

The Role of Budget Stabilization Funds in Smoothing Government Expenditures over the Business Cycle

The economic downturn that began in 2001 resulted in sizable budget shortfalls and arguably the worst fiscal conditions for state governments in decades. The use of savings to stabilize cyclical fluctuations in the budget has been institutionalized in most states in the form of budget stabilization funds. In this article, the authors explore how state expenditure volatility is affected by the existence, size, and structure of stabilization funds using multiple measures of expenditure cyclicality over the period from 1969 to 1999. The results indicate that while most states have not witnessed a reduction in expenditure volatility over the business cycle, states with rule-bound stabilization funds experience significantly less expenditure volatility from utilizing a budget stabilization fund. In fact, the authors find that state expenditures are approximately 20 percent less volatile following the adoption of a rule-bound budget stabilization fund.

Red ink in the rearview mirror: local fiscal conditions and the issuance of traffic tickets

Municipalities have revenue motives for enforcing traffic laws in addition to public‐safety motives because many traffic offenses are punished via fines and the issuing municipality often retains the revenue. Anecdotal evidence supports this revenue motive. We empirically test the revenue motive using a panel of annual data for North Carolina counties from 1990 to 2003. We find that significantly more tickets are issued in the year following a decline in revenue but that the issuance of traffic tickets does not decline in years following revenue increases. Elasticity estimates reveal that a 10 percent decrease in negative revenue growth results in a 6.4 percent increase in the growth rate of traffic tickets. Our results suggest that tickets are used as a revenue‐generation tool rather than solely a means to increase public safety.

Political Control and Public Sector Savings: Evidence from the States

The right to access (and ultimately spend)public sector savings is determined by the party which can control the politicaloutcome. This implies that anticipatedfuture changes in the states controllingpolitical party may systematicallyadversely affect current savings. Extendingthe Life Cycle/Permanent Income model, Ishow that a representative legislator willopt to forgo current saving in favor ofspending when his prospects for futurepolitical control diminish. Estimating apanel data model of 39 states from1973–1995, I find that an actual futurechange in the controlling party of astates lower house significantly reducescurrent saving.

Is There a Connection Between Reciprocity and Tax Competition

One challenge states face in designing income tax systems is deciding how to treat nonresident earners. Numerous states have entered into reciprocity agreements with other states that exclude nonresidents’ income from the tax base. These agreements provide a unique opportunity to explore the nature of state tax competition. The authors demonstrate that not only do reciprocity agreements allow states to have higher income tax rates than do nonreciprocity states but also that the states with reciprocity agreements exhibit increased levels of competition over other taxes.

Political Effects on Pension Underfunding

Pension underfunding in the public sector has received considerable attention recently and is often cited as the next looming crisis. The majority of recent research has focused on appropriately measuring the underfunding. In this paper, we employ a political economy framework to show that increases in partisan polarization and electoral uncertainty lead to greater underfunding. Using an unbalanced panel of individual pension plans, we find robust empirical evidence that higher legislative turnover rates, more electoral competition, and term limits all lead to more pension underfunding. The political environments of state and local governments play a pivotal role in pension underfunding.

State income tax reciprocity agreements and small businesses

Purpose - – Small businesses play a vital role in job creation and economic growth, and previous studies have noted that higher state tax rates may reduce entrepreneurial activity, growth, and hiring. The paper aims to discuss this issue. Design/methodology/approach - – In this paper, the authors use a 1989-2005 panel of state-level data to explore the effects of state income tax reciprocity agreements on several measures of small business activity. Since a reciprocity agreement exempts non-resident income from a states personal income tax base, it has the potential to reduce barriers to entrepreneurial activity and lower tax compliance costs. Findings - – The results indicate that reciprocity agreements appear to have reduced the tax-rate sensitivity of entrepreneurial activity, which may lead to more small business and entrepreneurial activity in states with more active agreements, other factors constant. This suggests that personal income tax reciprocity agreements may be a credible policy tool to expand small business activity. Originality/value - – In this study, the paper sets out to determine if small business and entrepreneurial activity is greater in states that have reciprocity agreements and if such activity is dependent on the number of active agreements in place. Given recent nationwide efforts to ease compliance costs for business through other initiatives such as the Telecommuter Tax Fairness Act and the Streamlined Sales Tax Agreement, this study is the first to quantify how decreasing tax compliance and eliminating barriers to labor mobility affects small business activity. The results therefore have the potential to help shape debates in many states today.

Expressive Voting and Redistribution

Incorporating the possibility that individuals may vote partially as an act of ‘expressive behavior’ is one of the most promising modern extensions of the rational-voter model. The rational-voter model, founded in the work of Downs (1957), Tullock (1967), and Riker and Ordeshook (1968, Riker and Ordeshook 1973), assumes the voting calculus of an individual is a function of both the expected cost and benefit of voting. The cost of voting is traditionally considered to be the opportunity cost of the time, effort, and expenses required to undertake the physical act of casting a vote. As originally developed, the benefit side of the equation includes only factors relating to how much more likely the voter’s most preferred outcome is to win the election if the voter chooses to cast a vote. Thus more precisely, the central factor affecting the voting decision of an individual in traditional rational-voter models is the probability that the voter will cast the ‘decisive vote.’

A simple approach to balancing government budgets over the business cycle

Despite the renewed interest in fiscal rules to constrain government deficits and debt, most rules provide no guidelines for reaching fiscal objectives in practice. This note demonstrates how to construct simple and transparent savings-rate rules that could aid policymakers if balancing the budget over the business cycle is a goal.

Are Traffic Tickets Countercyclical

There is anecdotal evidence that local governments use traffic tickets to generate revenue. Using panel data for North Carolina counties, we examine whether changes in local government revenue influence the number of traffic tickets issued. We find strong evidence of an asymmetric response by local governments. Specifically, positive changes in revenue have no effect on traffic tickets, but negative revenue changes increase the number of traffic tickets issued. A one percentage point decrease in revenue yields a 0.38 percentage point increase in traffic tickets. We calculate that traffic ticket revenue supplements a low percentage of local revenue losses.